Are there gains to be made with the grocery giants?

There is a growing storm of controversy around Coles (ASX:COL) and Woolworths (ASX:WOW) as they face intense scrutiny over price hikes and supplier pressures in a Senate inquiry.

This raises an interesting question as to whether investors should cut ties with these corporate giants or whether there is the prospect of finding a gem that is waiting to be unearthed. Let me explain.

Australian households are grappling with the relentless surge in living costs through higher interest rates and the burden of inflated supermarket bills. While this weighs heavily on the average family, there could be a silver lining for investors. These escalated supermarket prices may translate into healthier profits and potentially signal a bright future for both Coles and Woolworths.

Flashback to August last year when Woolies and Coles announced profits of 4.6 per cent and 4.8 per cent, respectively, over the past year. Those numbers might not make your jaw drop, but here’s the kicker: Both Coles and Woolies have seen their earnings increase year on year since 2020. All of this has occurred during a pandemic recovery and inflation storm.

You would think that with shoppers spending less, earnings would decrease, but the opposite has happened. So, how did they pull it off? There can really only be two reasons: squeezing suppliers for lower costs while stacking the supermarket shelves with higher-margin products.

Interestingly, despite Woolworths’ earnings uptick, its share price has taken a nosedive, with the stock down approximately 25 per cent from its peak in August 2021. Worse, from a technical perspective there is no indication the downward trend will halt anytime soon.

However, here’s the silver lining I was talking about: Woolworths’ share price has a track record of bouncing back splendidly after corrections in the range of 20 to 30 per cent. So, if the company can keep the profit train rolling despite a sluggish economy, this stock has the potential to outperform over the longer term.

Coles share price is also down about 20 per cent from its peak in August 2022. In contrast to Woolies, however, its share price has been rising since October 2023. If this trend can continue, I see the potential for the price to reach around $19 in the medium to long term, which provides a fantastic opportunity for savvy investors and traders.

What are the best and worst-performing sectors this week?

The best-performing sectors include Utilities, up just under a per cent followed by Consumer Staples and Materials, which are both down just over one per cent. The worst-performing sectors include Healthcare, down more than three per cent, followed by Real Estate and Consumer Discretionary, as they are both down over two per cent.

The best-performing stocks in the ASX top 100 include Lynas Rare Earths (ASX:LYC) and Bank of Queensland (ASX:BOQ), which are both up over six per cent; followed by IDP Education (ASX:IEL), which has been up over three per cent. The worst-performing stocks include Dominos Pizza (ASX:DMP), down over seven per cent; followed by James Hardie (ASX:JHX), down over six per cent; and, Block (ASX:SQ2), down more than five per cent.

What’s next for the Australian stock market?

This week, the sellers have taken control, steering the market down by around 2 per cent, making this week one of the most significant weekly drops of the year. Regular readers will know that I have been anticipating a significant peak in the All-Ordinaries Index this month and that April would be volatile.

Initially, I expected the peak to occur closer to the end of the month, but it now seems like the peak might have arrived early. If sellers keep up their commitment to driving prices down next week, we can expect a fall of 8 to 12 per cent from the all-time high of 8,168 points that occurred on April 2. This means that the All-Ordinaries Index could fall to 7,500 or even 7,200 points over coming weeks.

While a market correction of more than 8 per cent can be intimidating, it’s important to remember that these corrections are very normal and occur frequently. Further, they offer some of the best opportunities for those who can buy into good stocks at cheaper prices. The market gives you these favourable situations each year, so it’s essential that you prepare yourself to take advantage of them.

That said, I am not suggesting diving into stocks while the market is falling. I am suggesting investors stay vigilant and keep watching the market and key stocks closely, so they’re ready to pounce as soon as signs of a reversal appear. Right now I still like the Energy, Materials and Utilities sectors, and it may pay to start looking there for good stocks that will likely rise once the pullback has finished.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au

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